VAT - cutting down on avoidance, evasion and unfair outcomes
The Budget introduced a raft of measures which, according to the government’s Red Book, will prevent VAT avoidance, evasion and unfair outcomes. Taken together, these measures will raise an estimated £1bn of additional revenue for the Exchequer over the next five years. While some of these measures represent the culmination of previous consultations, others are somewhat more surprising and so businesses should carefully consider their position as a response.
First, the European courts have prompted the government to rethink the UK’s VAT grouping provisions. At present, a VAT group permits two or more UK-established corporates to submit a single VAT return and critically ignore supplies between the members of a group. In the case of financial services businesses this not only simplifies VAT compliance it may also reduce irrecoverable VAT on costs.
The good news is that the VAT group eligibility criteria will be extended to include a range of non-corporate entities and a policy paper published earlier this year on the topic this did not predict any particular economic impact on the Exchequer. Therefore, why were these measures included in the section of the Red Book dealing with avoidance?
Fast forward to Budget day, and there are two additions to the announcement on these measures which may explain its place in the Budget papers. From 1 April 2019 HMRC will be amending the definition of bought-in services to bring more charges into the scope of UK VAT – creating a cost for any VAT groups that aren’t able to reclaim all of their VAT. HMRC also appears to be considering an extension to the restriction of VAT group membership to protect the revenue and stop foreign businesses joining a UK VAT group.
Since July this year, the insurance industry has been braced for a change to the rules governing the right to VAT recovery which will tackle a form of VAT avoidance known as ‘looping’. The changes are not quite as extensive as the draft legislation suggested and will now only prevent VAT recovery for providers of insurance related services to non-EU customers where the insured is UK based. In common with many anti-avoidance measures it is quite possible that this change will negatively affect many innocent companies.
A more surprising development fell under the heading ‘Unfulfilled supplies’. In some cases a prepayment for goods or services which are never delivered (but is not refunded) falls outside the scope of VAT. This means a business may collect a charge without paying any VAT on that supply. From 1 March 2019, all prepayments will fall into the scope of VAT.
Last but not least VAT-adjusting credit notes (referred to as regulation 38 adjustments because of the legislation governing their use) have long been a difficult area for the government as adjustments under this regulation may extend beyond the usual four-year cap. This has prompted many businesses to seek recovery of overpaid VAT in periods that would otherwise be out of time and in circumstances when this VAT will not be repaid to the original consumer. The changes will ‘guarantee businesses are transparent and do not benefit from VAT that is due to the consumer or the Exchequer.’